European Recession Takes Firm Hold

One reason to fear that we can replicate merely decent job months like December is the situation in Europe. The story has followed a familiar pattern: a crisis period, followed by a big, showy solution, which lasts for a few days, until investors realize that solution won’t work. We’re in the “realization” stage at this point.

New data coming out of Europe reinforces that. For example, Italian 10-year debt yields pushed back above 7%, showing that the European Central Bank plan to offload cheap money to banks – so they can buy government debt at a profit – won’t solve all of the problems of sovereign borrowing. Debt costs for Spain and France rose as well. Bonds from the EFSF did have a strong demand yesterday (though they had to offer a higher rate to attract demand), but that essentially deals with yesterday’s problem, in Portugal and Ireland. The EFSF lacks the firepower to make a meaningful contribution to any debt crisis in Spain and Italy.

Debt negotiations in Greece, where bondholders would take up to a 50% haircut, are nearing their conclusion. But again, this fights the last war. The real problem for Europe is a recession.

But the euro zone’s three largest economies all issued data showing signs of economic deterioration late in 2011. German retail sales posted declines, French consumer confidence ebbed and Italian unemployment registered a further increase.

(German) retail sales fell 0.9% during the month, according to calendar- and seasonally adjusted data, following a 0.2% decrease in October. Analysts said retail sales in the euro-zone’s largest economy seem poised for an overall contraction in the fourth quarter. Economists’ forecasts had centered on a 0.5% increase.

In France, December consumer confidence hit its lowest level since the height of the financial crisis in October 2008. The reading came as President Nicolas Sarkozy prepares to raise value-added taxes, a move that could strike a further blow to consumer sentiment.

Unemployment in Italy continued rising in November, to 8.6% from 8.5% in October. November job losses were particularly hard on younger workers, age 24 and under, for whom the jobless rate rose above 30% for the first time, from 29.2% in October, according to the official Istat statistics agency.

So that’s a quarter of contraction for Germany, a recession projection for France starting in 2011 Q4, and a recession in Italy, which started in 2011 Q3. Those are the three biggest economies in the Eurozone, and they all are contracting. That’s to say nothing of the peripheral economies like Spain and Greece. And bank stocks are falling across Europe.

This cannot help but dampen overall economic performance globally. Europe is a major trading partner. Their financial community connects with other large ones in the world. Europe was in a debt crisis last year, but a recession will have larger knock-on effects. And most of the economic malaise in Europe has been created through austerity. It’s totally insane.